Overnight we warned that short-to-medium-term money market rates had spiked to record highs (1-Year rate-swaps over 5.06%) and that the PBOC was bravely standing firm on its (lack of) liquidity injections... that didn't last long. Despite the PBOC's veiled ongoing attempts to 'taper' its own liquidity provisions, as MNI noted, echoes of the June liquidity crunch were heard again in the Chinese money market Thursday and authorities moved to extend trading amid a surge in rates which quiet injections of funding by the People's Bank of China failed to stem. Jitters in the Chinese interbank market since the PBOC tried to force deleveraging in June highlights the nervousness of an overstretched banking system that is reliant on the central bank's largesse to ensure stable operations.
Trading in the interbank market was extended by a half hour, traders said, citing a notice from the China Foreign Exchange Trade System, something which hasn't happened since money market rates hit record levels back in June.
The PBOC admitted after the close, via its official microblog, that it used Short-term Liquidity Obligations (SLO) to add funding to the market. The bank didn't specify when it added the funds but, in another direct echo of the June panic, the PBOC said it is prepared to add more.
"We will continue to provide liquidity support via SLOs to qualified financial institutions if necessary, depending on the progress of fiscal spending," the bank said, adding that liquidity conditions are volatile because of seasonal factors.
Some traders expect a degree of calm to return once Christmas and the January 1 holiday have passed and liquidity returns to the system.
But the Chinese New Year comes soon after that, beginning at the end of the month, and the authorities have signaled they intend to wean China's notoriously mismatched financial system off its addiction to credit creation over the longer-term, indicating that rates will remain volatile in the weeks and months ahead.
This is a problem - and this is why the banks are terrified - Goldman's projection of Chinese debt to GDP through 2014 and 2015 is incredible...
and problematic as corporate bond yields surge higher... (with repo only maintained by government largesse)
It seems clear that the Chinese banks' PBOC taper tantrum will not allow the central bank to withdraw painlessly.